George Osborne insisted the budget's centrepiece was supporting working families by increasing the personal tax allowance by more than £1,000. Photograph: Facundo Arrizabalaga/EPA

George Osborne's gamble in cutting the top rate of income tax to 45p came under mounting assault after the chancellor announced that his generosity to Britain's richest 300,000 households would be accompanied by a "stealth tax" on pensioners, a fresh £10bn attack on welfare and continued cuts to child benefit.

Osborne insisted that the centrepiece of his third budget was a move to take a million low earners out of tax through the biggest increase in personal allowances for 30 years.

But Labour accused the chancellor of funding this giveaway through a "granny tax", pointing out 4.4 million taxpaying pensioners would lose on average £84 a year as a result of the plan to freeze their personal allowances. They claimed Osborne had thrown away any pretence that he was a one-nation Conservative.

Faced by the Labour charge that he was being a friend to millionaires, and not the millions, Osborne insisted that higher stamp duty on house sales worth more than £2m and a general clampdown on tax avoidance by the wealthy would more than compensate for the small amount of revenue lost by trimming the 50% tax rate to 45% from next April.

His claim that cutting back the top rate to 45p would lose the Treasury as little as £100m – a view very cautiously endorsed by the Office for Budget Responsibility – was hotly contested by politicians and economists alike.

Osborne insisted: "No chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that."

He later told Tory MPs privately that he did not see the 45p rate as a permanent feature of the landscape, something he also indicated in private talks. In public he gave no hint of this further cut likely to cost £600m.

Cameron's former speechwriter Ian Birrell warned on the Guardian website: "By giving in to an alliance of the right and the rich, George Osborne has made a basic blunder that sends a missile into six years of Tory modernisation."

Osborne himself insisted the budget was primarily designed to support working families after bowing to months of Liberal Democrat pressure by raising the income tax personal allowance by more than £1,000 to £9,205. The measure, skewed to lower-rate taxpayers, affects 23 million taxpayers and will cost £3bn.

The Liberal Democrat leader, Nick Clegg, said: "This is a budget every Liberal can be proud of. We are very proud that we are taking 2 million people out of paying income tax altogether."

After the chancellor's budget speech, Ed Miliband, the Labour leader, told Osborne that voters would wonder which planet he and the prime minister, David Cameron, were on and challenged the cabinet ministers before him to raise their hands if they would personally benefit from cutting the 50p tax rate, something they refused to react to.

He said the budget marked the death knell of the coalition's repeated slogan that in attempts to cut the deficit and promote economic recovery "we are all in it together". "Wrong choices, wrong priorities, wrong values," he told MPs. "Out of touch. Same old Tories." Labour later claimed 14,000 people earning £1m a year or more were getting a tax cut of more than £40,000 each year.

Osborne said the priority for the government was to pay off its debts, although with the economy still struggling to recover from the deepest recession in postwar history, he unexpectedly cut corporation tax on company profits to 24%, a move that will cost £730m. Britain was on course to have the most competitive business tax regime of any major industrial country, he said.

But the small print of the Treasury's red book showed that tax increases and future spending cuts would be needed in order to ensure that the government remained on course to hit its plan to eliminate the deficit on current spending by halfway through the next parliament.

Osborne said he would freeze age-related allowances for pensioners, raising £1bn by 2015-16, and find an extra £2bn a year from Britain's welfare bill.

Ros Altmann, director general of Saga, said: "This budget contains an enormous stealth tax for older people. Over the next five years, pensioners with an income of between £10,000 and £24,000 will be paying an extra £3bn in tax while richer pensioners are left unaffected."

The decision to "correct" anomalies in VAT and close VAT loopholes will see the tax imposed on items such as sports drinks and holiday caravans, eventually raising £350m a year. Reducing the 40% income tax threshold will mean an additional one million earners dragged into a higher tax bracket, while the planned increases in petrol duty will go ahead this year despite the recent increase in the price of crude oil.

The chancellor said the budget was aimed at rewarding work, and announced measures to improve the supply side of a still weak economy. For the first time since he arrived at the Treasury, Osborne did not have to announce lower growth and higher borrowing, with the outlook almost identical to that at the time of the autumn statement in November.

Although vulnerable to a fresh eurozone crisis and higher oil prices, forecasts from the Office for Budget Responsibility show the economy expanding by 0.8% this year, slightly higher than the 0.7% pencilled in last November, but at 2% in 2013, down from 2.1%. The outlook for the public finances has also remained virtually unchanged, with borrowing in 2012-13 expected to be £120bn falling to £98bn the following year.

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